Whenever the use of targeted tax breaks to attract or retain businesses in Michigan is criticized, some public officials inevitably point to particular employers who supposedly would have departed or never located here were it not for such incentives. This is intended to demonstrate the need for selective tax preferences, but in reality it only shows Michigan’s failure to transform itself into an attractive place to do business.

Imagine a restaurant with second-rate food, surly waiters, slow service and high prices. When the manager sees a customer getting restless, he rushes over and offers a 15 percent price cut.

The defenders of targeted tax breaks should expand their vision and concentrate on making Michigan such a good place to live and do business that companies rush to get in, without needing special “incentives.” This means low taxes, an absence of excessive regulation, a good quality of life, good schools, and a workforce that has a solid work ethic and no “entitlement” mentality.

If this state is lacking in those qualities, the correct question is “Why?” and, “What can we do to fix it?” It is not, “What kind of special discount can we provide to make a particular employer stay, even though we fall short in one or all of these factors?”

As an analogy, imagine a restaurant with second-rate food, surly waiters, slow service and high prices. When the manager sees a customer getting restless, he rushes over and offers a 15 percent price cut. He also stands on the sidewalk offering discounts to potential customers who look like they might walk on by.

At the end of each day this manager sends glowing reports to the owner describing how many sales he "saved" by offering "incentives." He spends his free time thinking up new incentives that might persuade underwhelmed customers to buy mediocre meals.

Isn’t it obvious that this is not a viable business plan, and that this manager shouldn’t spend another minute dreaming up new “incentives,” but instead should focus on making the food better, the service more pleasant, and the prices lower for everyone? The restaurant’s owner, employees and diners would be much better off if the place were so attractive that customers stood in line to get in, and the thought of targeted discounts never entered the participants’ minds.

The same applies to Michigan’s use of targeted tax breaks to prevent particular employers from leaving, or entice a handful of new ones to come.

These incentives are no different than the targeted discounts our restaurant manager hands out, whether the incentives come in the form of Michigan Single Business Tax credits offered by the Michigan Economic Growth Authority, or as property tax discounts offered by local governments. Officials who defend or brag about such incentives are just as myopic about how to fix Michigan’s economy as that restaurant manager about his “business model.”

Given this, it’s not really surprising that a comprehensive study by the Mackinac Center for Public Policy shows that MEGA’s targeted tax break program is also ineffective. Using a time-series econometric model designed specifically to measure the MEGA program’s economic impact, the study clearly shows that MEGA did not improve Michigan’s per-capita personal income, employment or unemployment rate. It’s been a distraction from the really effective work that needs to be done — improving the business climate for everybody. And quite often, it works against itself by granting favors to some firms at the expense of competing Michigan companies that don’t get similar treatment.

A restaurant manager who covers up his failure to provide value to all customers by offering discounts to a few of them should probably start looking for another job. At the very least, he shouldn’t hold up his targeted incentive “victories” as indications of a successful business model.

Similarly, the extent to which targeted business tax credits and abatements are defended by state policy-makers is a function of their failure over the years to make Michigan an attractive place to do business. Michigan will know its problems are over when so many employers want to locate here that we laugh at the idea of someone seeking special treatment, in much the same way that the manager of a popular restaurant can afford to wave off a customer who seeks a discount. Unfortunately, maintaining a system of targeted tax “incentives” distracts us from the job of pursuing reforms that will bring this kind of success to Michigan.

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Jack McHugh is a legislative analyst for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.

ISSN: 1093-2240,
SKU: V2005-20

Summary

A restaurant that offers good food will be more successful than one that gives special price discounts to selected customers who are dissatisfied with mediocre food. Michigan’s policy-makers should apply the same insight to their economic development efforts.